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An Ex-banker’s Thoughts on Silicon Valley Bank and the Banking System

I have heard lots of commentators on what happened with Silicon Valley Bank (SVB). Many of the commentators have weak banking credentials. For example, I heard Robert Reich expounding on the situation. Reich was Secretary of Labor in the Clinton administration. Secretary Reich may be well intentioned, but as far as I can tell, he never worked in banking.

My take on what happened is that history repeated itself. Many Savings and Loans failed in the 1990s because there was a mismatch in their assets and liabilities. The S&Ls took in short-term deposits and used them to fund long term mortgages. That’s what I used to call 3-6-3 banking. Take in money at 3%, lend it out at 6%, and be on the golf course by 3 p.m.

The problem was that when interest rates went up, the cost of deposits didn’t stay at 3%; they went up, and suddenly there was no spread- the difference between what banks earn on loans and investments, and what they pay out on deposits. Hundreds of Savings and Loans were merged and closed in the ‘90s because of the asset liability mismatch.

Subsequently, we bankers had to constantly manage and report to regulators how our assets and liabilities would behave in the face of interest rate increases and declines. The regulators would have been all over us if we took in short-term jumbo deposits such as SVB did and invested the money in long-term fixed rate treasury bonds. Perhaps the management of SVB was too young to have 1990s’ banking experience, but I can’t believe that the regulations now are any less than banks had then. I don’t care for Donald Trump, but blaming his administration for relaxing rules on banks is nonsense- banks have plenty of oversight, whether or not some rules were relaxed.

The other thing that makes sense was that the regulators were well aware of what SVB had done, and the bank was under orders that might have corrected the situation, given sufficient time. The bank was probably required to reduce its long-term bond holdings and to raise new capital. They started to take these steps in quarterly SEC. I suspect that the regulatory orders became public in their SEC reporting, the “public” panicked, and the game was up.

One of my graduate school banking professors used to describe the banking system as like the fairy tale,” The Emperor’s New Clothes”. As long as everyone thinks that the emperor has clothes on, all is fine. As soon as one little boy says the emperor has no clothes”, everyone else agrees on and all of a sudden there is a problem. No bright-line amount of capital or reserves that can say that everything is OK with the banking system. It’s based on what people believe is OK.

Some have asked why the regulators didn’t act earlier in this case. Typically, regulators don’t take action themselves until there is a problem. They’ve taken the right steps to resolve the problem. Some time has to go by and hopefully everyone will be comfortable that the emperor is once again wearing clothes.

Lee Tabas, President, TABASFUNDING, consultant, former President, Royal Bank of Pennsylvania, Graduate, American Bankers Association School of Banking. 

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